Want the best small business strategies delivered straight to your inbox?

News

How to Deal With Rising Rent, Gentrification & Your Bottom Line

Last Updated on April 22, 2016

Eric Goldschein is a staff writer at Fundera. He covers entrepreneurship, small business trends, finance, and marketing. He was previously the managing editor of SportsGrid.com, and has written for Business Insider, the Huffington Post and more.

A business owner who moves into a relatively cheap commercial space is doing the right thing by keeping their fixed costs down. A business owner who finds a cheap space in a neighborhood that suddenly becomes more popular, thanks to the forces of gentrification, probably feels like they struck gold. But that same business owner might just end up in the tough position of suddenly dealing with massive rent increases, or even a lease non-renewal or eviction, from their landlord realizing the new worth of the space.

This change in overhead can be devastating for your bottom line, particularly if the business’s profits were due in part to the disparity between revenue and costs. And if faced with a non-renewal, you might find yourself forced to move away from the community that helped you find success in the first place. These scenarios should be avoided at all costs—though when it comes to commercial real estate, nearly all the power rests with the landlord and the lease that’s been signed.

“There aren’t a lot of things a small business owner can legally do,” says Marla Meg Gordon, a New York City-based attorney and resident of Harlem, New York. “You sign your lease for a term of years, and after that you either have to renegotiate with the landlord or leave.”

As with many things, it’s better here to apply an ounce of prevention rather than a pound of cure. The trick is to try to avoid putting your business in this situation instead of fighting to get out of it.

Know your rights when you first sign your lease

Going into a lease, it’s important that business owners understand what they’re agreeing to upon signing—because the words in that contract are the only thing that matter. Working with a lawyer ahead of time to secure certain rights or options to renegotiate are the best leverage points a small business can have.

“The thing people can do in advance is negotiate an option to renew at a price they can live with, so that the choice is in there in case the neighborhood takes off and they’re in a better position,” says Gordon. “People need to be careful about what they’re signing and know if there’s any flexibility in what they signed.”

Gordon recommends going online to find the standard commercial lease in your state or city: in the case of New York, it’s a Blumberg form. Reviewing that lease can help you understand what the nature of your relationship to the landlord and space will be.

For a small business owner, this due diligence can pay off in a big way, especially when you compare it to the cost of a legal battle.

“The small business owner usually doesn’t have the resources to engage in some sort of legal dispute with the landlord, which is expensive,” says Gordon.

For some long-standing businesses in gentrifying neighborhoods, the day of reckoning is still a ways away, thanks to older commercial real estate practices that allowed for long-term leases.

“Once the neighborhood starts to change, you’ll notice older stores that are outdated and you’d think would be gone, but those places may have 99-year leases,” says Gordon, “because back in the day, people would rent a commercial space for that long. Now, that’s not happening. So you will have a smattering of these older businesses that are just incorporated into the neighborhood and don’t have to leave.

“And in general, those are not assignable, so it’s not like someone with a long-term lease can say to some other company that wants to put in a hipster coffee bar, ‘Why don’t you take over my 100-year lease?’”

This, however, is one of the reasons why business owners should review the terms they have with a lawyer—Gordon notes there are situations where the person with a long-term lease does have the right to sublet. If you’re trying to start a business, subletting from that situation might be the way to go.

Negotiate with the bargaining chips you have

A landlord is legally allowed to charge however much they’d like for a commercial space, although realistically they can only charge as much as the market will bear. In gentrifying neighborhoods, the market is still in flux, which means that a large increase in rent can be a gamble.

“What I see happening in Harlem is that people get greedy,” says Gordon. “There was a Chinese food restaurant nearby, across the street from where a Whole Foods is being developed, and once that development started the Chinese food place was gone after having been there for years. But now the place is empty, because I’m sure the landlord is asking for an inordinate amount of rent, even though the building with the Whole Foods hasn’t even been built yet.”

If your landlord is planning to raise your rent to the point where you can’t afford to stay, your best bargaining chip is that you’re already in the space and paying rent. While theoretically the landlord could make more from another tenant, they run the risk of shooting too high and losing money… While the storefront or office space remains empty.

To this end, it might be worth researching the rent prices of nearby commercial spaces to see what others are charging. If your landlord is overshooting the average price, bring that information to the table. You could be able to negotiate a more reasonable rent for the next lease and at least stave off eviction—giving you time to find other ways to cut costs and increase revenue.

Sharing your space—and the economy

If a landlord chooses to evict or refuses to renew a lease, there’s not much a company can do. However, if the landlord is simply raising the rent to what you think is an untenable rate, you could consider downsizing in the space and bringing in another tenant to share the cost.

This isn’t possible for some types of businesses—it would be difficult for two restaurants to share the same space! But Bennett Singer of Question Why Films, an independent production company focused on social issue documentaries, cherishes his office in Union Square in Manhattan despite the changes to the area and having to deal with ever-rising costs.

“We moved into this space in 1999, and every two years the rent has gone up 10%,” says Bennett. “Now, money shifts as time has gone by, but in general the building and the area has totally gentrified. When we first moved into the building it was a lot of artist studios, photography studios, some film—so then it was very, you could say, rustic. That has evolved, and depending on the floor, things have changed drastically.”

Sharing the space with another tenant—with the landlord’s approval—became the only option for Question Why, but the loss of floor space has been worth it.

“There are some trade-offs, but I’ve found that sharing the space has been overall a positive experience—putting aside the money, there’s the social aspect and some cross-pollination between my office and theirs, both formally and informally.”

Bennett added his co-tenant officially, putting them on the lease. A similar option is not uncommon:there are independent business types who are interested in sharing a space, and perhaps just want a desk, on a month-to-month basis. As Gordon notes, this may or may not be allowed per your lease, so check first.

“’People do it all the time,’ she says about sharing office space without informing the landlord. It depends what kind of business it is and if the person needs their name to be downstairs. Once you need your name on the roster, then you have to involve the landlord. But things in the ‘gray market’ happen all the time.”

In general, Bennett found that many small business owners are facing this challenge, and that working together to find creative solutions often helps.

“With my co-tenant, we started this monthly group called ‘Friends Without Benefits,’” says Bennett. “About 20 of us get together—an interesting mix of freelancers, writers, designers, software folks—all of whom are facing similar business challenges, whether it’s health insurance, social media, and real estate challenges.” Bennett notes that many business owners have taken similar steps to maintain their office space and stay viable.

***

While there are some loopholes that business owners can take advantage of—for example, a tenant who has filed for bankruptcy protection can’t be evicted—it’s generally difficult to prevent a landlord from forcing you out. The best resources are those you take advantage of ahead of time, when agreeing upon a lease. Good fortune also favors those who are flexible in their needs and can share space when necessary.

Unless you’re one of the lucky few currently in the midst of a century-long lease, non-renewal is one of the great obstacles in the face of sustaining a good small business. Protect yourself the best you can from the outset to avoid having to find a new home.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those
of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Eric Goldschein is a staff writer at Fundera. He covers entrepreneurship, small business trends, finance, and marketing. He was previously the managing editor of SportsGrid.com, and has written for Business Insider, the Huffington Post and more.